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Appalling South Africa GDP readings need interest rates cut

Appalling South Africa GDP reading reinforces that SARB needs to cut interest rates – fast

The latest economic reading out of South Africa with a GDP contraction at an alarming 3.2% during the first quarter of 2019 against the final quarter of 2018 has confirmed what everyone already knew, that the South African economy continues to underwhelm. The problem is that the economic data release has accelerated even the most pessimistic concerns regarding the health of the South African economy.

What we do know is that emerging markets are having to contend with a tornado of different external headwinds, and these including persistent trade tensions that are adding further downside anxieties to economies that are reliant on resilient global demand. South Africa is just one of the many nations that is heavily exposed to the fears of another world recession arising at the turn of the next decade.

The problem that is not helping South Africa, or other emerging markets across the world by any means is that the latest Manufacturing PMIs across the world are confirming further contractions. South Korea, Japan, Taiwan, Malaysia, Russia, Poland, Turkey, Italy, Germany and the United Kingdom have all seen Manufacturing PMIs contracting in recent weeks.
This is a reliable signal that a coordinated world slowdown is close to arriving, and the GDP reading out of South Africa has reinforced these expectations further.  

The headline reading that this is the largest quarterly drop in the South African economy in around 10 years is going to ring a number of different alarm bells across South Africa. But, before the reality of an impending world slowdown further pushes the button on another recession, the spotlight needs to turn towards what the South African Reserve Bank (SARB) can do to deflect the repercussions of an impending downturn.

The answer is simple – SARB have to cut interest rates. And they need to do it sooner, rather than later to not stand as victim of weakening global demand for goods. SARB do have the envy of other central banks at their hands in that they can ease monetary policy , should they chose to do so. Policymakers would need to get on with easing policy to reinvigorate domestic momentum through lower interest rates, in the hope of encouraging higher consumption. Otherwise the reality is that South Africa will remain exposed to external headwinds impacting demand for its goods, which is likely to be clamped down on even further as economic data releases globally confirm that a world slowdown is arriving.

South Africa is actually lucky in one sense. Its central bank has the flexibly to adopt an accommodative approach to a weakening world economy. This is something that the European Central Bank, Bank of England and even the Bank of Japan would wish to have. Even the Reserve Bank of Australia only cut interest rates to a new record-low at 1.25% overnight. How much further can Australia afford to lower interest rates? Even the Federal Reserve in the United States are under market expectations to put its car in reverse, after raising US interest rates as many as eight times in the past three years.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

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